(c) State the formula for the current ratio and explain what it represents from a financingperspective.(3 marks)(d)Work out the current ratios for 2015 and 2016 and using the results explain how the financing of working capital changed in 2016.(2 marks)(e)Work out the firm’s capital employed from an operating perspective for 2015 and 2016 and using the results explain why its asset turnover fell in 2016.(4 marks)(f)Define ROCE in terms of operating margin and asset turnover and using your results for Part (a) and Part (e) identify the factors responsible for the change in ROCE in 2016.(3 marks) (Total: 18 marks) Page 4 of 9
16. It is 1 January 2017. A recently-formed rapidly-growing company provides its part-time employees with a defined contribution pension plan and its full-time employees with a defined benefit pension plan. The company wants to use “pay-as-you-go” accounting for its defined benefit plan whereby the costs of the plan are recognised when retired employees are paid their pension. The plan pays 1.5% final salary as annual pension per year of service completed.(a)Explain briefly the key differences between a defined benefit and a defined contribution plans in terms of the risksthat employees and employer are exposed to.(5 marks)(b)Explain briefly why pay-as-you-go pension accounting for the defined benefit plan violates the matching principle and whether using it would be likely to under-state reported profits (i.e. be lower than they should be) or over-state them (i.e. be higher than they should be) at the company at this time.(5 marks)(c)The firm has decided to follow IFRS for its pension accounting. Using the projected unit credit method work out how much the firm should charge as the current service cost for 2016 for one of its full-time employee given the following information.Employee’s salary in 2015 £80,000Expected annual salary inflation 2.5%Expected length of service 22 yearsExpected lifetime after retirement 24 yearsPlan discount rate 5%The formula to calculate the present value of an annuity is given by:11Present value () of an annuity = NrPVPMTrwhere is the payment each year, the annual discount rateand the number of yearsPMTrN(8 marks)(Total: 18 marks) Page 5 of 9
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